A STUDY ON RISK HEDGING STRATEGY: EFFICACY OF OPTION GREEKS

. Arya Kumar

Abstract


Financial Derivatives are innovative instruments in the financial market. Derivatives have a great deal of use in risk management. A judicial use of derivatives in right proportion enables a corporate manager to minimize risk and optimize return. Basically, there are four categories of derivatives i.e. Forward, Futures, Options, and Swaps. In India, futures and options are commonly used. In option derivative, the premium which is paid by the option holder to the option writer is known as option premium or option price. For determining the theoretical price of the option, the most appropriate model i.e. Black Scholes option pricing Model. This option pricing model is well accepted throughout the world. If the theoretical price of an option contract deviates significantly from its actual price, then the financial market will be seriously disturbed. This paper studies the efficacy of commonly used Greeks such as Delta, Gamma, Theta, Vega, and Rho and their significance in managing various types of risks associated with an option contract. Further these five Greeks are taken only for European Option within the Black Scholes Model framework. The scope of the study covers monthly option pricing and Greeks of ITC, HDFC and RELINFRA for the month of January 2017. Lastly, an attempt has been made to explore the implication of these Greeks for managing the risk associated with an option contract.


Keywords


Derivative, Risk Management, Option Pricing

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References


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